Interest rates are up again – but the peak is close

The US Federal Reserve might have moved into the interest rate slow lane – with a rise of 0.25 percentage points – but the Bank of England still has its foot on the pedal.

The rate-setting Monetary Policy Commitee (MPC) thinks inflation has peaked but inflationary pressures remain naggingly persistent and unexpectedly strong. The 0.5 point base rate increase it imposed as a result was the 10th in a row and brings them to their highest level for 14 years.

That bears repeating because the rate at which interest rates have risen is quite remarkable. But then, so is the sudden surge in inflation. The devastating consequences of the latter can be seen by taking a trip to your local food bank.

Mortage holders will groan but the rise was as expected. Business groups, whose members also find themselves at the sharp end of inflationary pressure, have largely been sanguine.

The CBI has sighed that it was still too soon to call it the peak rate (it is too early). The Institute of Directors (IoD) has pointed to its survey data showing less than one in four business leaders believe inflation has peaked, contrary to the view of the MPC.

Some context: a majority think it will have peaked by spring and there have been signs from the IoD’s data of an improvement in confidence, albeit from a very low level. All this underlines the following point: there aren’t many people arguing with the MPC.

Its dovish duo – Silvana Tenreyro and Swati Dhingra – were the exceptions. They have consistently argued for a less aggressive course. This time they voted to keep rates on hold.

Voices in the wilderness? Maybe not. There are straws for borrowers to clutch at. Catherine Mann, the MPC’s most hawkish member who dissented on the upside by calling for a 0.75 per cent rise last time, went with the majority this time. The language in the MPC’s release was also notably softer than it has been.

The “further increases in Bank rate may be required” was qualified this time: “If there were to be evidence of more persistent (inflation) pressures, then further tightening in monetary policy would be required.”

The word “forcefully” – as in the MPC will respond “forcefully” – was also absent. Some might look at that and wonder whether I’m reading too much into the phraseology. Yet, the MPC and its members are well aware of how closely their words are monitored – and the influence they can have on decisions made in the City and beyond. If only some of our senior politicians were similarly astute.

The balancing act the MPC has to perform is now more delicate than ever. Yes, inflation is still high – and core inflation did not fall at all in the last set of figures. But the UK economy is also weak. Not as weak as the Bank once thought. But weak enough for the International Monetary Fund to forecast it as the only major economy to contract this year. That includes the sanctions-blasted Russia.

To get inflation under control, the majority on the MPC seem minded to accept a short recession, which it would hope is shallow. The Bank has guided down market expectations over the peak interest rate. There were projections of 5.25 per cent, or more, when Liz Truss was doing her worst. The Bank has now noted that the markets believe 4.5 per cent will be the number.

Obviously, this implies further rises. It seems likely that the next one may, however, be 0.25 percentage points, with perhaps a second such rise at the subsequent meeting. The MPC next gathers in the middle of March, at which point it will have two sets of inflation figures to help it to gauge how well its harsh medicine is working.

One thing in its favour: the response of Jeremy Hunt, which was perhaps the most significant of all. The chancellor described inflation as “a stealth tax”, which it is. He promised to ensure “government decisions are in lockstep with the Bank’s approach”. That includes “resisting the urge right now to fund additional spending or tax cuts through borrowing”.

The latter could be read as a shot across the bows of Truss. Of course, Hunt’s statement would appear to leave open the option of funding tax cuts by slashing spending. But an electorate broadly in sympathy with the unions’ line that strikes are about underfunded services, as much as pay, isn’t likely to be terribly impressed with that.